The convergence of Wall Street's meltdown, falling insurance industry surplus, uncertainty over the future of medical care financing and a persistently soft commercial lines market has created a perfect storm of challenges for liability carriers covering long-term-care facilities. To survive and prosper, health care liability underwriters must therefore stay focused on core competencies and use best practices with risk selection and pricing.

This market will not reward cash-flow-conscious or creative but unprincipled underwriters. Such mavericks could be in store for a world of hurt as this market unfolds. Ignoring the simple principle of whether each individual risk placement strengthens the book as a whole might boost the top line in the short run, but the bottom line result could be quite messy.

Some of the looming challenges to the LTC liability market that lie ahead appear quite predictable. For even the most disciplined underwriters, the following challenges will be difficult to overcome.

o Diminished Confidence. An insured's confidence in the financial rating of companies will be severely tested.

Soft markets are characterized by “commoditized” products. Add the perceived uncertainty of whether a carrier possessing a strong financial rating from an independent rating firm carries much influence for a line of business with a moderate tail, and insureds might wonder if their current carrier can meet their obligations when they come due.

o Adverse Risk Selection. Many LTC owner/operators not experiencing the painful sting of claims in the recent past will weigh their options closely.

Tightened discretionary dollars might prompt them to look into the justification of carrying insurance. If they feel their exposures are manageable and calculable, barring any contractual or other requirements, these operators might elect to go bare of liability insurance altogether.

Conversely, owner/operators familiar with a history of claims will likely continue to look for attractive ways to transfer risk to insurers. If the pendulum shifts too dramatically from insuring the desirable risks to the latter, less-desirable exposures, a corresponding dilution of underwriting results can be expected.

o Increased Frequency. Loss frequency, which reached a plateau in 2007, might very well rebound in the wake of the current financial environment.

With the overwhelming majority of LTC beds being Medicare- or Medicaid-supported, most residents are required to liquidate assets as a condition of receiving government assistance. This dynamic often puts residents and their next of kin in an adversarial position with care providers.

Such estate depletion can only be expected to exacerbate given the distressed financial market. Next of kin, who are generally children of the LTC resident, might have suffered their own as well as the estates' financial losses due to market conditions. This impact might feed a willingness to engage in frivolous lawsuits, which consequently will drive up claim frequency.

o Rising ALAE/Retention Enforcement Issues. Increased frequency will drive up allocated loss adjustment expenses, or ALAE. Coupled with reducing insured retentions, the burden of paying for ALAE will be largely shouldered by carriers. As a result, underwriting profit margins will dwindle.

With those accounts trading premium relief in exchange for assuming more risk via retentions, the financial impact on the account could lead to the retention being unpaid by the insured, thus requiring the insurer to step into active defense at the retained level to protect its interest.

LTC liability claims have a moderate tail, which means an account placed today could be financially viable now, but be compromised when dollars within the retention are needed. That could put a carrier's adjuster in the unenviable position of being a collection agent.

o Staff turnover. There has been much discussion in recent months about nursing shortages in skilled care facilities. With employment options in abundance for good nurses, skilled care facilities may not be their election of choice.

Couple this with financial woes resulting from payment problems, and good nurses might elect more comfortable and less financially restrictive settings than nursing homes as their employer.

Diminishing job attractiveness could result in nursing homes employing lesser-experienced nursing staff, or having to go outside the organization to staff positions. Among the resulting concerns are providing less quality care and lesser control applied over the nursing staff.

o Scaled-Back Risk Management. With less discretionary cash, insureds might put less money into their own internal loss control/loss prevention initiatives.

Financial duress might require they cut back to acceptable minimums. In many states, such minimums would represent the risk management provided by the carriers themselves.

o Apathy/Resentment. With share values precipitously dwindling, it's not likely that the public will show much sympathy to the plight of stock insurers.

Action could range from apathy in the form of not contributing to carrier capital contributions by purchasing stock, to a more severe resentment of financial institutions as the perceived cause of the current economic situation. Potential jurors called to sit on cases against insurers might be negatively predisposed to make the carriers pay.

Apathy and resentment are not feelings a carrier wants present in a jury panel composition. The selection process might weed some tainted jurors out, but likely some will make it through. If this becomes widespread, plaintiff judgments and their resultant rewards could elevate appreciably, even in more conservative venues.

The bottom line is that, given all of the issues beyond carrier control present in the current financial and insurance market, it is imperative that insurance providers of LTC liability insurance not lose sight of the principles of good business–prudent underwriting, risk selection and accurate pricing for the risk profile.

Special Reports /

The LTC Liability Market Is No Place For Mavericks

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